Fair wages have always been a contentious point of discussion among workers and businesses, but the rise of contractual work and the gig economy has made this question even thornier. With many companies still slow to adopt California’s AB5 bill, below is a primer on what small businesses need to know in order to get their operations up to speed.
Clarifying the difference between employee and contractor
The biggest question regarding AB5 is how to differentiate between an employee and a contractor. The California Supreme Court created a three-way test to help businesses classify their employees and contractors. In order for a worker to be considered a contractor versus an employee, Investopedia summarizes the criteria as follows:
- The worker can perform services free of the company’s control and/or direction
- The worker performs tasks that are outside of the company’s regular activities
- The worker is also engaged in an independently established trade or business
AB5 is meant to make businesses see that many of the contractual workers they hire to help with daily operations should actually be considered as full time employees. The above considerations are seen as the gold-standard test for identifying contractors and employees.
Understanding the changes in paperwork
Companies will have to issue W-2 forms to their employees (including those who do not pass the test above) and keep six copies of the form per employee. Each W-2 will include wages, compensation, and fringe benefits. From there, employees may also be allowed to deduct un-reimbursed business expenses that were required by the company.
On top of this, the reclassification of employees also means that employers have to reimburse the added Social Security and Medicare tax liability, as well as pay Unemployment Insurance Tax and the Employment Training Tax.
Adjusting your finances accordingly
The AB5 law means contractors are now eligible for overtime pay, health insurance, and other employee benefits; our outline of the ‘Types of Paid Leave’ also lists out other additional costs businesses will have to shoulder aside from what’s legally mandated. It’s therefore no surprise that small businesses will have to revisit their financial plan. With Maryville University linking financial planning and business strategies as key components of success, businesses have to make sure all operations are sustainable. One of the biggest decisions small businesses have to make is whether to compensate for these additional costs by increasing the cost of services or simply absorbing it internally.
Choosing between the two isn’t an easy decision to make, but it helps to work with your company’s legal team (or an employment lawyer) to see what’s feasible after having reclassified all your employees. You might want to adjust your team’s schedules to avoid racking up overtime costs, or perhaps even combining roles if you need to make your team smaller.
The Los Angeles Times reports that the current coronavirus pandemic has accelerated the need for companies to adopt the bill to help employees look after themselves in these increasingly difficult times. While businesses have to put in a considerable amount of work to fulfill the new requirements set by AB5, it pays off in the long run as it makes sure your employees know they’re being taken care of.
Lane Grant is a consultant and a freelance writer who contributes to different independent publications. She lives with her two dogs and enjoys hiking and cycling on her free time.